ABA Taxation and Compliance 3 — Questions and Answers
Question 1: A taxpayer receives a $10,000 distribution from a traditional IRA at age 45. In addition to income tax, what additional penalty generally applies?
- 10% early withdrawal penalty (Correct answer)
- 20% excise tax
- 6% excess contribution penalty
- No additional penalty applies
Correct answer: 10% early withdrawal penalty
Distributions from a traditional IRA before age 59½ are subject to a 10% early withdrawal penalty, with limited exceptions.
Question 2: Under the passive activity loss rules, which type of income can offset passive losses?
- Passive income only (Correct answer)
- Active income and passive income
- Portfolio income and passive income
- Any type of gross income
Correct answer: Passive income only
Under IRC §469, passive activity losses may only offset passive activity income; they cannot offset active or portfolio income.
Question 3: Which form does an S corporation use to report each shareholder's share of income, deductions, and credits?
- Schedule K-1 (Form 1120-S) (Correct answer)
- Schedule K-1 (Form 1065)
- Form W-2
- Form 1099-DIV
Correct answer: Schedule K-1 (Form 1120-S)
S corporations provide each shareholder with a Schedule K-1 (Form 1120-S) showing their pro-rata share of corporate items.
Question 4: The accumulated earnings tax (AET) is imposed on C corporations that:
- Retain earnings beyond reasonable business needs to avoid shareholder-level tax (Correct answer)
- Fail to pay estimated taxes on time
- Distribute more than 100% of current-year earnings
- Have more than 100 shareholders
Correct answer: Retain earnings beyond reasonable business needs to avoid shareholder-level tax
The AET (IRC §531) targets C corporations that unreasonably accumulate earnings to shield shareholders from dividend taxation.
Question 5: A business accountant discovers a client overstated deductions on a prior-year return. The best immediate action is to:
- File an amended return (Form 1040-X) and pay any additional tax owed (Correct answer)
- Wait for the IRS to audit and correct the error
- Offset the error against next year's return
- Do nothing if the statute of limitations has not expired
Correct answer: File an amended return (Form 1040-X) and pay any additional tax owed
Voluntary correction via an amended return minimizes penalties and demonstrates good-faith compliance with tax law.
Question 6: What is the standard mileage rate primary advantage over the actual expense method for deducting vehicle use?
- Simplified recordkeeping requiring only mileage logs (Correct answer)
- Higher total deduction in most cases
- Applies to both personal and business use without proration
- No depreciation recapture on vehicle sale
Correct answer: Simplified recordkeeping requiring only mileage logs
The standard mileage rate simplifies compliance by eliminating the need to track individual vehicle expenses, requiring only a mileage log.
Question 7: Which of the following best describes the 'nexus' concept in state sales tax compliance?
- A sufficient connection between a business and a state that obligates the business to collect and remit sales tax (Correct answer)
- The minimum revenue threshold triggering federal income tax
- A treaty provision limiting double taxation
- The point at which property tax assessments are finalized
Correct answer: A sufficient connection between a business and a state that obligates the business to collect and remit sales tax
Nexus determines whether a state has jurisdiction to impose tax obligations on a business, expanded by the Wayfair decision to include economic nexus.
ABA Taxation and Compliance 3
A taxpayer receives a $10,000 distribution from a traditional IRA at age 45.
In addition to income tax, what additional penalty generally applies?